[Determined CPA]

On June 30 of the current year Huff Corp issued at 99, one thousand of its 8%, $1000 bonds. Huff uses GAAP. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000. On June 30 of the CY,Huff should report bond liability at:

The answer is 999,000

1000 bonds * 990

Why isn’t the answer $1,000,000?

My thinking is as follows:

Cash $955,000

Bond Issue Costs 35,000

Discount 10,000

Bonds Payable $1,000,000 (isn’t the the liability?)

A - 75
B - 78 God is good.
F - 77 Answered prayers.
R - 84! Done!!

Paperwork sent - waiting for license!!
Still on a cloud and in shock. Through God, all things will happen.

[Anonymous]

@DeterminedCPA

The liability would be carried on the balance sheet NET of the premium or discount. So in this case the journal entry to issue the bonds is:

Dr. Cash (1,000,000*.99) 990,000 (less the cash paid in bond issue costs) – 35,000 = 955,000

Dr. Bond Issue Costs 35,000

Dr. Discount on bonds payable (1,000,000 – 1,000,000*.99) = 10,000

Cr. Bonds Payable (Face Value, Always) 1,000,000

The Liability is: Bonds Payable 1,000,000

< Bond Discount><10,000>

Carrying Value 990,000

========

If it was a premium then you would add the premium to the face value to get the carrying value. The carrying value can normally equal the cash received, but since they paid bond issue costs, they received less cash. Hope this helps!

[Determined CPA]

Makes sense – thank you! Bonds are kicking my butt. cant seem to wrap my head around it

thanks for help! good luck on a passing far score!

A - 75
B - 78 God is good.
F - 77 Answered prayers.
R - 84! Done!!

Paperwork sent - waiting for license!!
Still on a cloud and in shock. Through God, all things will happen.

[Peach1024]

The bond liability is always reported net on the balance sheet, so the actual liability in this case = Bonds Payable – Bonds Discount. If it had a premium, the total bond liability would be Bonds Payable + Bonds Premium.

I got tripped up on this too a few times in the MCQs but after a few I realized they were trying to emphasize the point that the bond liability takes into account the discount or premium.

Edit: CPA4ME beat me to it. 🙂

AUD - 88
REG - 76
BEC - 88
FAR - scheduled for 10/20/14

[Determined CPA]

Both very helpful! Thank you =)

A - 75
B - 78 God is good.
F - 77 Answered prayers.
R - 84! Done!!

Paperwork sent - waiting for license!!
Still on a cloud and in shock. Through God, all things will happen.

[Rocky123]

I have trouble with bonds too. I understand the basics, but I get confused when they talk about warrants, convertible bonds, etc.

It is my weakest area in all of FAR. That and leases.

The tallest oak in the forest was once just a little nut that held its ground.

AUD-PASS
BEC-PASS
REG-PASS
FAR-PASS

Rocky123, CPA

[Anonymous]

Bonds and leases were also my weakest areas and I did the homework on those sections at least twice. I recommend making your own notes very detailed of the effective interest method (do about 2 years worth). Then put the journal entries for bonds and make notes of exactly how to calculate each portion. Sometimes taking the answer to a complex bond or lease problem is helpful if you keep referring back to it and working it multiple times.

For things dealing with Equity like Treasury Stock, Stock Dividends, EPS, Options.. I made the journal entries for each one and highlighted the plug item. It's important to know if you need to plug APIC, like in Par Value Method of Treasury Stock, or whether to plug APIC when exercising stock options. Because a lot of these entries have the same concepts like always debiting cash when you get money and Common Stock at Par and APIC at FMV-PAR. So make sure you know the MAIN DIFFERENCE in each entry.

[Determined CPA]

CPA4ME1 thanks for the advice! this is going to be a weekend of nonstop studying!

A - 75
B - 78 God is good.
F - 77 Answered prayers.
R - 84! Done!!

Paperwork sent - waiting for license!!
Still on a cloud and in shock. Through God, all things will happen.

[Author]

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